5 ways the pandemic is changing how you access credit

Jul 21, 2020

This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.

Over the last decade, award travel grew from a niche and secretive hobby to a strategy for millions of people around the world to enjoy free travel. This massive growth coincided with the longest bull market in U.S. history, with banks spending heavily to expand their credit card portfolios and sign up as many new customers as possible.

All of that changed seemingly overnight, as the stock market dropped from record highs to slip into a bear market in record time. As the coronavirus pandemic continues to spread, the economy has been dragged into a recession. This is the third recession of the millennia, following the dot com crash in the early 2000s and the mortgage crisis in 2008. But the speed and severity of this recession are unlike anything we’ve ever seen before. Here are five ways the pandemic-induced recession is changing the way you access credit.

Interested in more credit card news and advice from The Points Guy? Sign up for our daily newsletter.

In This Post

Tightened approval standards

(Image by Mutlu Kurtbas / Getty Images)
(Image by Mutlu Kurtbas / Getty Images)

If you’re using your credit cards responsibly in the pursuit of travel rewards, it means you aren’t carrying a balance from month to month. This means you’re not paying any interest, which can compound quickly and can easily erase the value of any free travel you might get. However, to credit card issuers, each new account they open is a risk: if you rack up bills, lose your job and default on your payments, the banks stand to lose money.

Related reading: Issuers are cutting credit limits, but here’s what you can do about it

During a recession issuers try and decrease their overall risk and exposure, and one of the easiest ways to do this is to make it harder for new customers to get approved for credit. This can be done in a number of ways, such as raising the minimum score needed to get approved for a card or only approving customers who have an existing relationship with the bank.

These changes aren’t advertised to the public, but the minute the economy slips into a recession you can rest assured that banks will be tightening their approval standards. This doesn’t mean you should stop applying for cards entirely during a recession, but you should be a little more judicious and only apply for cards where you have an excellent chance of approval and previous history with the bank.

Related reading: 5 ways the global recession is affecting credit cards and banks — and the upside for some cardholders

Reduced credit limits

During a recession, banks also look to limit their exposure from existing customers. In almost every recession on record, consumer spending decreases due to massive job losses and economic uncertainty. This means that people are less likely to use all of the credit available to them, so card issuers will often review accounts and decrease credit limits of their existing customers.

 

The logic here is quite sound: If you’re using all of your available credit at a time when post people are cutting back on spending, it might signal that you’ve lost your job and are struggling financially, exactly the kind of behavior banks are looking to shield themselves from.

Overall this isn’t a practice you should be too concerned with, though it might cause your credit score to drop a bit. The less total credit you have available to you, the higher your utilization ratio will be. This factor accounts for 30% of your credit score, though if your spending also decreases now you won’t see much of a change.

(Photo by Getty Images)
(Photo by Getty Images)

Related reading: 6 things to do to improve your credit in 2020

Fewer balance transfer / 0% APRR offers

While carrying a balance is bad for you as a consumer, it’s a great way for credit card companies to make money. When the economy is strong, many issuers offer free balance transfers on certain cards or cards with a limited time 0% APR rate. These can be a great strategy to help tamp down your interest payments while you get out of debt, but card issuers are obviously hoping you’ll continue to carry a balance once the promotional period has expired.

Related reading: Credit card debt: Everything you need to know

Defaults tend to rise during a recession, meaning the idea of taking on additional debt to make a profit suddenly becomes a huge risk for banks. Fairly early on in this recession, Chase removed its balance transfer Chase Slate card from its website and stopped accepting new applications.

The information for the Chase Slate has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

If you were relying on a balance transfer or 0% APR card to pay off your credit card debt this year, you might have a tougher time doing so. Instead, you can focus on one of the classic debt payoff strategies. There’s the “snowball” method where you attack the smallest balance first, and then once that’s paid off roll that payment into the next smallest balance, or there’s the avalanche where you attack the highest interest debt first.

Fewer credit limit increases

Even if you’re an existing customer, getting a bank to extend you additional credit now is going to be much harder than normal, as you have to convince the bank why you suddenly need more credit now without sounding like a risk. Doctor of Credit reported that Chase is even applying its notorious 5/24 rule to credit limit increases, and rejecting requests from applicants who are over 5/24.

Some issuers are also making it harder to reallocate credit limits between cards. Normally this is a very simple process, and with just a few restrictions (including the minimum amount of credit you need to leave on each card and how often you can reallocate), you’re allowed to do whatever you like. As with everything else on this list, expect a lot more friction here for the time being.

Fewer credit card/loan advertisements and mailers

In January and February, before the pandemic really took hold in the west, banks were mailing out over 300 million credit card offers a month according to a report by the Wall Street Journal. By May, that number was down over 75% to just 74 million.

Related: Why banks are struggling to assess creditworthiness during the coronavirus pandemic

With issuers focussing more carefully on only approving safe and creditworthy applicants, widespread advertising such as mailers has fallen off. The same can be said for limited-time welcome bonuses, which help attract new applicants to certain credit cards. Since the recession started, we haven’t seen any exciting elevated offers on travel rewards cards. Normally we see at least two or three deals a month, often more, but it might be a while before those elevated offers come back.

Bottom line

Credit, in all its forms, becomes a huge liability during a recession. When people lose jobs they often lose the ability to pay back their debts as well, and that can result in massive losses for banks and financial institutions. This is the first recession to occur since travel rewards become widely popular, and we’re already seeing a number of ways that it’s making it harder for people to access credit.

Featured image by Emilija Manevska/Getty Images.

Chase Sapphire Preferred® Card

WELCOME OFFER: 60,000 Points

TPG'S BONUS VALUATION*: $1,200

CARD HIGHLIGHTS: 2X points on all travel and dining, points transferrable to over a dozen travel partners

*Bonus value is an estimated value calculated by TPG and not the card issuer. View our latest valuations here.

Apply Now
More Things to Know
  • Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $750 toward travel when you redeem through Chase Ultimate Rewards®
  • 2X points on travel and dining at restaurants worldwide, eligible delivery services, takeout and dining out & 1 point per dollar spent on all other purchases.
  • Get 25% more value when you redeem for travel through Chase Ultimate Rewards®. For example, 60,000 points are worth $750 toward travel.
  • With Pay Yourself Back℠, your points are worth 25% more during the current offer when you redeem them for statement credits against existing purchases in select, rotating categories.
  • Get unlimited deliveries with a $0 delivery fee and reduced service fees on orders over $12 for a minimum of one year on qualifying food purchases with DashPass, DoorDash's subscription service. Activate by 12/31/21.
  • Earn 2x total points on up to $1,000 in grocery store purchases per month from November 1, 2020 to April 30, 2021. Includes eligible pick-up and delivery services.
Regular APR
15.99%-22.99% Variable
Annual Fee
$95
Balance Transfer Fee
Either $5 or 5% of the amount of each transfer, whichever is greater.
Recommended Credit
Excellent/Good

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.